Experts chime in on erratic economy

Interest rates are rising fast, but not as fast as the price of gold is falling. And the stock market seems to ricochet between 100-point gains and 100-point losses on a whim.

Financial markets have been on tilt since Federal Reserve Chairman Ben Bernanke announced on June 19 that, if projections for economic improvement hold up, the central bank will wind down its $85 billion per month bond-buying program next year. Bernanke's signal of an end date for the stimulus program, while not unexpected, threw markets into chaos.

The ripples from Bernanke's remarks quickly spread through the economy, precipitating a three-day plunge in stock prices (much of which has since been reversed), a steep increase on bond and mortgage interest rates, and a sharp drop in the value of precious metals.

The irony wasn't lost on Vassar College economics professor David Kennett.

"So good economic news means that the QE (quantitative easing) stimulus program will be shut down sooner," Kennett said in an email, "and that means interest rates will rise, which hurts bond prices and hurts stocks, as well as perhaps slowing the real economy as the cost of credit and mortgages goes up."

At the beginning of the year, the average rate for a 30-year fixed-rate mortgage was about 3.34 percent, according to Freddie Mac. This past week, the average jumped from 3.93 percent to 4.46, posting the largest one-week increase in 26 years. The higher rate adds about $128 a month to the cost of a $200,000 mortgage.

"The buyers are now realizing that their windows of opportunity have shrunk," said Laurel Sweeney, president of the Ulster County Board of Realtors. "But houses have to be priced appropriately. We're not in a seller's market."

Observers worry about the effect rising rates might have on a housing market that's finally showing signs of recovery.

"Rising interest rates, especially a significant jump like (last) week, puts pressure on the buyers to find something before they are priced out of the market," said Chris Scibelli, owner of Keller Williams Realty in Highland Mills.

The threat of higher interest rates has also spurred homeowners on the fence about refinancing to do it now, said Joan Eck, the chief credit and service officer at Ulster Savings Bank.

"We have definitely seen people who were waiting on the sideline come in because they're concerned rates are going to go up," Eck said, noting that even the current rates are still very low by historical standards.

Rates for car loans are not expected to increase significantly, said John Russell, the chief financial officer at Jeff Bank.

The Fed is still keeping short-term rates low, plus there isn't much interest-rate risk on car loans, because borrowers start to pay back principal almost immediately.

In a coincidental development unrelated to the Fed's machinations, beginning Monday, rates on federally subsidized student loans will double to 6.8 percent. The increase comes about because Congress failed to pass legislation keeping the rate at 3.4 percent. It could add thousands to the cost of college over a 10-year repayment period, according to a press release from Senator Chuck Schumer.

Rising interest rates don't figure to fatten the wallets of depositors, who have seen their money earn a meager 1 percent or so in CDs the past couple of years.

Rates on bank deposits — everything from checking accounts to CDs — are "sticky" and won't spike along with other interest rates, said Tim McCausland, the chief strategy officer at Orange County Trust. But rising interest rates will allow Orange County Trust to earn more from its business loans, McCausland said. That means the bank's spread between what it pays out on its deposits and what it earns on loans will widen and the bank over time will become more profitable.

"Increasing rates will have a positive effect on banks, especially community banks, who have suffered from a yield squeeze for the past five years," McCausland said. "Earnings will go up."

Take that one step further, and that means bank stocks could be a good investment.

Bonds, usually considered a safe investment comparable to a savings account, could actually become more volatile than equities depending on how high interest rates go. As bond rates rise, their prices fall, making them a more attractive investment.

The Dow Jones Industrial average climbed 14 percent from January to June. Then, the Bernanke bomb dropped, and the Dow tumbled by more than 700 points in the days immediately after.

It has since recovered nearly half of that loss, but the wild swings in either direction have left investors reeling. Because of the day-to-day volatility, Rundle cautions against jumping in and out of investments.

"I think people need to focus on long-term objectives," Rundle said. "Going for the short term is not advisable in this market."

Kersting suggests investors check out stocks that pay out dividends year after year and have clear balance sheets.

Younger people with years ahead of them before retirement are in what Kersting called "a sweet spot."

They can use dollar-cost averaging — investing a set amount at regular intervals — to get more shares for their money when prices are low.

The long-term prospects for stocks will ultimately depend on companies' earnings, said Brian Haughey, assistant professor of Finance at Marist College.

"If companies can continue to increase their profits, it'll tend to propel stock prices," he said.

A year ago, people with a stash of old gold jewelry might have rushed to a gold-buying store for a sizeable chunk of cash. These days, they might want to leave it in the safe.

Gold started the year at about $1,675 per ounce, and had already fallen to $1,350 before Bernanke's announcement. Since then, the price has fallen even more, briefly dipping below $1,200 Thursday.

Steve Rinaldo, the director of operations for Fort Knox Jewelry & Loan, has seen the gold-buying part of his business drop off significantly this year.

To make up for it, he's selling more second-hand merchandise in his pawn shop division.

"People that think they know about it say it will go down more," Rinaldo said. "But it's like the stock market; If we all knew that, we'd all be rich."